Saturday, July 6, 2013

Another solid US jobs report

The US labour market put in another solid performance in June.  Non-farm payrolls increased 195k with another 70k added by way of revisions to prior months.  The unemployment rate remained unchanged at 7.6%, although a rough back-of-the-envelope calculation suggests it was perilously close to dropping back to 7.5%.  On the back of this result, Richard Fisher’s "feral hogs" had another big day at the office, pushing bond yields sharply higher.


The sector breakdown of the payrolls growth was largely as expected: 13k new construction jobs in line with recent gains in housing starts, 37k in retail trade and 53k in business services.  Weak sectors were also as expected with declines registered in government (-7k) and manufacturing (-6k), with the latter in line with recent ISM manufacturing surveys and softer export growth.

The June result plus revisions means non-farm payrolls have now averaged 196k over the last three months and 202k over 2013 thus far.  Private payrolls have averaged 199k over the last three months.  Labour market growth certainly has a more solid and more importantly, sustainable feel to it.  However, jobs growth of that magnitude is still only consistent with GDP growth of around 2% per annum (our forecast is an annual average 1.9% for calendar 2013).

The June unemployment rate was unchanged at 7.6%.  A dip lower was prevented by a second consecutive monthly tick higher in the participation rate to 63.5%.   A higher participation rate is an important sign of a return to a normally functioning labour market.  But its relatively low level continues to point to the challenge of getting the disenfranchised marginal unemployed person back into the labour market. 

As we've said for some time, while we know there are structural reasons for a lower participation rate, we believe there was a strong cyclical component as well.  As the economy and labour market conditions continue to improve, we expect the participation rate will continue to rise, limiting further declines in the unemployment rate.

Average hourly earnings rose 0.4% in the month to be up 2.2% over the year.  The annual rate of increase is towards the top end of the range since 2009.  Combined with low inflation, we are seeing a rise in real incomes which will continue to support consumer spending, a key factor behind our expectation of stronger growth in the second half of the year.

What's the Fed to make of this?  The more consistent solidity (note careful choice of “solidity” over "strength") of jobs growth means the Fed is right to start reducing the pace of its asset purchases soon.  I'm still favouring December over September, but the reality is the market has already more than priced it in so at this level of yields, the precise timing is now mostly of academic interest.  Remember the end of QE is a good thing - it means the US economy is better able to stand on its own two feet.  And the rise in real yields indicates this is more a normalisation of monetary policy and economic growth expectations than a spike higher in inflation expectations.  In that respect, higher interest rates are actually a good thing.

However, don't ignore the unemployment rate.  That's the measure of spare capacity in the labour market that will ultimately determine the Feds view on the outlook for the output gap and inflation and the timing of when they will end QE and when they will start to raise interest rates.   We agree with the Feds indication of no increase in interest rates until 2015.   With the dramatic increase in yields today that means the bond market is even further ahead of reality than it was last week.  Oink!